Dubai emerging confident from crisis

After a year away, Dubai's government has returned to bond markets

Once filled with the cacophony of cranes and construction labourers, Dubai now hums to the work of a quieter crowd. As they pore over the detritus of last year’s debt crisis, the city-state’s accountants and lawyers face a huge task.

The emirate’s flagship firm Dubai World has agreed to repay $25 billion of debt. The auditors’ task is to investigate exactly where the money went and what other financial landmines might lie in store.

But even as the accountants work to get to the bottom of the financial mess, Dubai is changing. The emirate Dubai is recovering its confidence as it seeks to convince international investors it can deliver now where last year it failed.

“The Dubai growth model that was talked about so much and propagated in the media – all that has changed now,” says Christian Koch, director of international studies at the Gulf Research Centre. “The crisis forced Dubai to take on a much more realistic approach.”


In 2008, the end of a six-year oil-fuelled boom burst Dubai’s real estate bubble while the global financial crisis left the emirate unable to refinance looming debt obligations.

To help Dubai support its state-linked firms, the national central bank, which is based in Abu Dhabi, had bought $10 billion in Dubai bonds in February 2009. But Dubai had much bigger problems.

Chief among them was Dubai World, which was struggling to pay its debts. Dubai World’s lenders had been quietly rolling over loans since early 2009 and the state-linked company hoped to renegotiate terms, extend maturities and keep paying interest as it worked out a restructuring.

But that plan depended on knowing how much government support the company could obtain. Over the summer and through the holy month of Ramadan, the state committee set up to support Dubai’s corporations was quiet on the matter.

On November 25, officials finally sounded the alarm. The definitive story of how the rescue came together may never be written, but Reuters has pieced together some of the key details of those days.

At 6pm, as many Emiratis and expats were winding down after work, the Dubai government summoned advisers and senior Dubai World executives to the offices of government lawyers Latham & Watkins. Government officials told the gathering that they had sought a stay of payment on Dubai World’s debts.

“No-one had anything to say,” says one person who was present. Like most people involved in the rescue, they refused to be identified, either for fear of tarnishing their reputations or because they remain involved in the process and are not authorised to speak publicly.

“The announcement was a disaster for Dubai. They were told ‘don’t worry, Argentina has done this, Venezuela has done it. People forget and they start lending again.’

The first repayment to be affected – a $3.5 billion Islamic bond from Dubai World’s real estate company Nakheel – was due on December 14.

The silence in that Dubai meeting became the standard setting over the next few days. Despite rumours in the global markets of a looming default, no official came forward to explain the situation until November 30. Financial markets looked to December 14 as a major test; bondholders, including aggressive hedge funds, smelled blood.

There was another option: Abu Dhabi. Officials in Dubai began hammering out a proposal to put to the larger emirate on how to deal with the looming default. On the evening of December 13, the night before the payment was due, they agreed on what the final proposal should say.

Crucially, it would not involve a full repayment of the bond.

“Nakheel was a big massive shock,” says a source familiar with the restructuring.


That evening, the weather in Dubai took an apocalyptic turn. Clutching the proposed deal and other documents, a banker from Moelis & Co, a U.S. investment bank that was advising Dubai, climbed into a waiting helicopter and took off for the capital.

Expecting him in Abu Dhabi were officials of the highest level, including Sheikh Mansour, half-brother of the ruler of the UAE and one of the most influential people in the federation today.

Rain and wind lashed the windowpanes of Dubai International Financial Center as the officials huddled, waiting. The banker had been instructed to call his team as soon as he left the Abu Dhabi meeting. Three hours on, there was still no word from him.

“We were so nervous, none of us had eaten all day,” says the source familiar with the restructuring.

The phone call never came. Instead, they heard the returning helicopter. Landed, the banker was whisked off into a meeting room to confer with the two top officials of Dubai’s Supreme Fiscal committee. Finally, the rest of the team were called in.

Abu Dhabi was offering to pay off the bond in its entirety.

“Abu Dhabi said, let’s just pay this thing off until you come up with a better plan,” the source familiar with the restructuring says. “They always said we are happy to help, we just want to see a plan.”


Seasoned UAE observers say the more outlandish rumours that circulated in the months after the Dubai World debacle – that Abu Dhabi would swoop in and seize Dubai land and assets or that the ruling families were embroiled in interpersonal rivalries – were always nonsense.

“The ruling families have no illusions whatsoever about what the role of each one is, who is the big guy and who is the second in line and so on,” Yasin says. “In my opinion, it was the middle management, the second tier, the business people, those who are not related to the ruling families but who work for them, who generated these ideas.”

The document for Dubai World's debt restructuring, seen by Reuters and agreed to by most of its creditors this month, outlines the city’s plans to sell assets over eight years to generate as much as $19.4 billion and lists ‘investment assets’ such as stakes in luxury retailer Barney’s, Dubai-based Atlantis Hotel, and casino operator MGM Resorts International among those that could be included. Ports operator DP World is among the ‘strategic assets’ which may generate up to $11.8 billion if put on sale.

Almost two-thirds of Dubai World’s debt is held by six banks, four of them British:  HSBC, Lloyds, Royal Bank of Scotland, Standard Chartered, and local lenders Emirates NBD and Abu Dhabi Commercial Bank.


In Dubai, there are signs confidence is beginning to return. Developer Nakheel, whose near-default propelled Dubai's banker on the November chopper ride to Abu Dhabi, has said it will begin building again next month.

After a year away, Dubai's government has returned to bond markets, launching a dual-tranche $1.25 billion bond. Early talk indicates the issue is heavily oversubscribed.

“The hard work has been sorting out Nakheel and Dubai World, and investors are more positive on Dubai because of its strong relationship to the rest of the UAE and as the legacy issues have been or are being addressed,” says Aviva fund manager Jeremy Brewin in London.

Dubai World's debt repayment agreement on September 10 “draws a line in the sand to a significant part of the debt restructuring story,” says V. Shankar, chief executive of Standard Chartered’s Middle East, Africa, Europe and the Americas operations. “There are issues still to be sorted out with Dubai Holding but I think on the back of this, Dubai has a powerful tail wind.”

Dubai seems focused on its core operations of logistics and trade. It recently opened the first phase of Maktoum international airport – part of Dubai World Central’s ‘aerotropolis’ complex, a shipping, air and road hub.

“Whilst no government can rule out future issues, we believe the most significant restructuring is behind us,” a government representative responded to emailed questions.

The government has embarked on a big push to create corporate governance structures. “The only criteria now is ‘personal hygiene,’ people who are clean,” says a long-time Dubai observer.

There is no doubt Dubai needs to encourage entrepreneurship, and continue to give ambitious Emiratis who do not come from wealthy families the chance to make their own fortunes.

The emirate is still making big plays. In July, Emirates airline – one of Dubai’s crown jewels and already the biggest customer for Airbus A380 superjumbos – placed an order for 30 Boeing 777 jets in a deal worth potentially more than $9 billion.

“Everything is now very conservative, it’s meant to be based on in-depth analysis of actual sectors,” says the source familiar with the restructuring. “Given the chance, Dubai will take it to the same level as before. They will always try to go as far they can with something.”


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